Herbalife has been here before, and it’s no stranger to the Federal Trade Commission, the agency Ackman ostensibly wants to take action. Chapman contends that the issue of how many of Herbalife’s products are consumed internally — a key focus of Ackman’s attack — was already addressed by the FTC in 2004. He links to a PDF of a document on FTC letterhead arguing that the question of whether employees consume most of the product isn’t the factor that determines whether an operation is a pyramid scheme.

Chapman also infers from Ackman’s going public that he has already concluded regulators will take a pass. “I believe Ackman already had concluded the FTC wasn’t going to assist his crusade. Instead, he realized that he had to focus on existing and prospective HLF distributors, praying the media attention would have a materially deleterious impact on any decision to join or to continue with the HLF team. Indeed, without the FTC taking injunctive actions against HLF, Ackman’s crusade toward ‘zero’ is doomed,” he writes.

End-of-year timing: “A classic bear raid involves creating abject panic in the market, and using the proximity to Christmas, the December option expiration, and the depth of Ackman’s presentation, the impact on the shares was maximized. The last 10 days of December are as quiet as it gets on Wall Street, with most decision makers leaving for vacation, drying up market depth and liquidity.”

Read the whole thing here. Oh, and, by the way, Herbalife’s stock is up 14% today and briefly topped $37 — a level it hasn’t seen since Dec. 20 — the same day of Ackman’s New York presentation.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 15 comments

JANUARY 3, 2013 1:18 P.M.

Anonymous wrote:

he's missing the point. a pyramid scheme is classified by the FTC as the business being more than 50% "recruiting" profits. Ackman demonstrated that the accounting is malicious and hides the fact that 95%+ comes from recruiting.

JANUARY 3, 2013 1:22 P.M.

short wrote:

He is right on point. HLF has been investigated before and nothing was found. Ackman is a scam.

JANUARY 3, 2013 1:41 P.M.

Sarah wrote:

People ie walll st have no idea about the business I have been in it for 25 years and some of my down-line make much more money than me where is the pyramid there ? its pure free enterprise those who do the work get the pay
waiting for the merciless short squeeze in at $29

JANUARY 3, 2013 1:42 P.M.

FTC = DSA wrote:

Yes HerbaLife was investigated before and nothing was found because our FTC is corrupt with members of the DSA behind the helm

JANUARY 3, 2013 1:44 P.M.

Are you kidding wrote:

Don't underestimate team Herbalife. Ackman's accusations will be refuted. The only question is how much damage he did to the company's reputation and short term growth prospects. If the FTC does nothing they will be stronger than ever.

JANUARY 3, 2013 1:45 P.M.

Jane wrote:

Merciless short squeeze :))) the pyramid theory is bull I have down line or under me that make much more money than me why because they wok harder period Ackman fails to understand that people love the products and FTC will do nothing long at $31

JANUARY 3, 2013 3:56 P.M.

jj wrote:

it was clean in 2004 , dirty sleazy since 2005 ???

JANUARY 3, 2013 3:57 P.M.

jj wrote:

HLF was clean in 2004 , dirty sleazy since 2005 ???

JANUARY 3, 2013 5:38 P.M.

me39cu wrote:

Since Ackman made his HLF presentation I have seen more bullish comments than bearish comments on HLF across a few financial websites, yet I have not seen one bull properly counter any of the many detailed arguments Ackman and his associates made. Instead, the bulls make simple general arguments as to why HLF is not a pyramid scheme that are easily refuted from Ackman's presentation or a little bit of common sense:

Bullish argument: A lot of people who become distributors are consumers who just want to buy Herbalife products at a discount.
Counter-argument: If that is the case can you explain why turnover is 90%? How is a 25% discount to the Herbalife suggested retail price really a discount when you can find the products on Ebay for a 50% discount or when you can find nearly identical products at GNC for even cheaper?

Bullish argument: I worked hard and made a good living from Herbalife. The people who fail aren't victims of a pyramid scheme, they just haven't worked hard enough.
Counter-argument: Herbalife misleads prospective distributors into how easy it is to make money. You are one of very few people who have made money from Herbalife (~1% make money if my memory serves me correctly). Working hard and being at the upper levels or the pyramid aren't mutually exclusive, so maybe your success has more to do with being lucky enough to have gotten in early. The group at the bottom of the pyramid as a whole is doomed to fail because there is limited consumption demand for Herbalife products. If all of them worked hard, they would just be taking equally small portions from a very small piece of the pie. Unlike a legitimate business that grows through real demand, the herbalife pie is not getting bigger (don't confuse creating a new pyramid for a growing pie).

Argument: People down line from me make more money than I do.
Counter-argument: Again, that is one of very few examples. What is more reliable: a few anecdotal cases or data based on thousands and thousands of people that show an incredibly high failure rate unless you are at the upper levels of the pyramid.

Argument: Herbalife has been around for 30 years.
Counter-argument: Bernie Madoff investors from 2007 called and want their answers back. Herbalife is brilliant at finding new markets of unsuspecting victims to tap. Every time one of its markets "pops and drops," Herbalife moves on to a new market. It has changed its geographical sales breakdowns many times to cover this up.

Herbalife stockholders and distributors are emotionally biased and either don't want to listen or don't want to believe what Ackman has to stay. I am not short Herbalife and I not a failed distributor. I listened to the Pershing Square presentation out of interest and was blown away with how comprehensive it was and how strong of a case against herbalife it made, and feel compelled to put the HLF bulls in their place. I cannot wait for the Herbalife investor presentation. I guarantee HLF is going to tell investors more of what they want to hear and will fail to address the specific points brought up in the presentation. The Herbalife pyramid collapsing is not a question of if, but when.

JANUARY 3, 2013 8:03 P.M.

Tex wrote:

Another scam everyone should be aware of is the Amway Tool Scam. Google "Stop The Amway Tool Scam WordPress" for more information, and forward this to every non-Distributor/IBO you know, so they don't get scammed.

JANUARY 4, 2013 3:27 A.M.

Steven_H wrote:

Herbalife has been around forever, It has constantly been labelled as snake oil. Bahh They sell decent products, and are working to expand and change their lines. Ackman is a capitalist and a hostile bear (much like Einhorn) who make millions through market manipulation. It's quite clear he took a massive short position and then proceded to drive the price down, effectively stealing from the equity investors.

I thinik we all know who the real snake oil salesmen are.

JANUARY 4, 2013 4:09 A.M.

Frank Booth wrote:

Ackman covered already, if he didn't he's an idiot. It was a scam from jump strret, if it was real then why would he advertise it? Him and Einhorn have pulled off this stuff before, they conspire, sort, create panic, and cover. Same old formula, different names.

Goldman Sachs recently did it with CLF from 34 to 28, today it closed back at 38. The sleaze never ends.

JANUARY 4, 2013 9:14 A.M.

Mary wrote:

$37 pre mkt to me39cu--- price of product includes follow up support a lot of overweight people need support they don't get that from gnc and gnc does not offer group support like a Club that is why the business is growing in old countries like Mexico open 25 years or Brazil 11 years or even Korea 15 yeas UK 27 years
and India 10 years
limited demand that is a joke Americans spend $6 billion a year on there pets HLF is on 80 countries where baby boomers will spend trillions on there health not to mention the sky rocketing obesity rates 60% in US
and countries like India now have big problems as people eat more junk food.
50% of small businesses fail by 2nd year does that mean owning a restaurant is a scam of course not &
in that case MacDonald's 's is a pyramid too and i can make a a better burger cheaper at home but when my kid wants one they are there worldwide providing a product that people want
Good luck with your short

JANUARY 4, 2013 10:10 A.M.

Anonymous wrote:

1. Regarding Chapman, in my opinion a fund manager who puts 35% of his portoflio in one stock is taking a big risk. Chapman was also long Nortel in 2008 according to an article in the NY Post ...

2. For those who claim that Herbalife has been investigated in the past and was not deemed a pyramid scheme, please do your research and look up the Belgian court case in 2011 that ruled HLF was a pyramid scheme. The filing is available on the internet. Just because FTC has not ruled HLF a pyramid scheme does not mean it won't in the future. Regulators can be slow to act.

3. I feel like it's deja vu with media and investors accusing short sellers of manipulating the market and acting improperly. This happened with Enron, Lehman, and many other cases where a company's integrity was in doubt, and the short sellers ended up being right.

3. Media is having a field day with the battle of words between the bears and the bulls. At the end of the day, anyone who gets involved on either the long side or the short side should do their own homework rather than basing their trade on what a certain investor thinks. It was disheartening to see that sell-side analysts immediately came out defending the company the same day Ackman made the presentation. Shouldn't they look into the claims first before dismissing them?

JANUARY 7, 2013 4:55 P.M.

anon wrote:

If you read this guys thesis he doesn't actually come out an say it is not a pyramid scheme. He's betting on the regulators not hounding the company and catching ackman in the squeeze with his confidence game. He has not actually offered an alternative analysis.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.